Indian Stock Surge Attracts Investors, Triggering Exodus from China

Indian Stock Surge Attracts Investors, Triggering Exodus from China

Ira Singh
17 Oct’23

In a significant turn of events, the Indian stock market has witnessed a remarkable surge, attracting a growing number of global investors, particularly those looking to diversify away from the Chinese market. This influx of international capital comes as India’s economic growth and market reforms continue to garner attention from investors seeking new opportunities and reducing their exposure to China.

India has surpassed China not only in economic growth but also in stock market performance. The MSCI (Morgan Stanley Capital International) India index has grown 7.5% this year, while the MSCI China index has declined 7.6%. Over five years, Indian stocks have risen 63% compared to a -18% return in the Chinese market. India’s GDP growth reached 7.8% in the June quarter, while China’s was 6.3%. Foreign investors have been pulling out money from Chinese stocks and investing in Indian stocks, despite higher valuations. China’s economic rebound has been weaker than expected, leading to deflation risk and investor sentiment decline, according to recent media report.

As the fastest growing economy, India’s GDP growth hit 7.8% in the June quarter, compared with China’s 6.3%. The IMF forecasts India’s economy to grow at 6.3% each in 2023 and 2024, while China’s economy is expected to expand by 5% and 4.2% in the same period, stated report.

“Indian markets look quite promising. There is good growth here.There is a lot of infrastructure investment going on, it’s one of the fastest- growing economies… Conversely, in China, we are seeing problems in the property sector…,” said Jonathan Curtis of Franklin Templeton during his recent visit to India.

Indian stocks have beaten Chinese equities by a wide margin supported by billions of dollars of foreign funds and retail investors, who have tripled in number after the pandemic.

Amid the economic uncertainty, Chinese households are holding on to savings resulting in tepid domestic demand. The economic slowdown has dented investor sentiment and weighed heavily on stock valuations.

China is an outlier in the post- pandemic reopening process in that its economy is facing intensified deflation risk instead of inflation pressure,” Grace Ng, senior economist for greater China at JP Morgan, said in a report last week.

Questions over investability in China have offered India an opportunity to shine. India’s economic fundamentals look favourable despite headwinds like geopolitical uncertainties, inflation, and supply chain woes.

According to recent data, in September, India saw foreign investors exit for the first time in six months —selling nearly $1.8-billion worth of stocks. But the sensex managed to climb 1,000 points in the same month on the back of resilient domestic flows.Large domestic investors poured nearly $3 billion into stocks in the previous month, almost 90% of which came from mutual funds.

“The Indian market is not dependent on the weakness in China; it is only one of the contributory factors.The growing number of domestic retail investors is a major reason… The steady growth in mutual fund SIPs is a healthy trend,” said V K Vijayakumar of Geojit Financial Services. He added that strong corporate earnings growth is attracting investors.

Hong Kong-based brokerage CLSA raised India to the ‘overweight’ category on Wednesday, saying it would allocate at least 20% more weightage to the country over what index management company MSCI has assigned it. Money is being taken out of China and Australia, and it will be invested in India, CLSA said.

Will the trend reverse when the Chinese economic growth engine engine revives? China’s economy is in the long process of deleveraging, which is expected to suppress growth. If at all a revival happens, it is unlikely to impact flows into India significantly, Vijayakumar said. “However, if the US bond yields rise further and remain elevated for an extended period that might trigger foreign investor outflows from India,” he added.